Investment in local public services: Nash equilibrium and social optimum

Within a two-community setting, we study the optimal provision of a local public good which is indivisible and generates interjurisdictional spillovers. Each community has to decide whether or not to invest in this public good, The resulting Nash equilibrium is compared with an optimal solution based on a Benthamian welfare function, We then analyze to what extent conditional grants are able to restore optimality when needed. (C) 1997 Elsevier Science S.A